The case against Tesla, and why success may be harder than ever

As Tesla Motors gets set to unveil its cheaper car, "Fast Money" traders could not see past its stock price.

The car business is my life. I buy cars, sell cars, finance cars and write about the whole processThat guy in high school who used to sit in the back of class and read car magazines all day? I was that guy, and I still am.

But I'm not blind to the industry's problems. As a former financial analyst, I knew General Motors was heading for trouble in 2007 and 2008, even when the company was pronouncing itself healthy. To supplement my income, I shorted 1,000 shares of GM stock — a good investment, as it turned out.

About a month ago, I decided there was a similar opportunity to short shares of Tesla Motors. I've supported some of their more virtuous pursuits, and the Tesla Model S is a superb product. But I think Tesla will be unprofitable for years to come, and has morphed into a glamor firm — one where people gleefully invest in the promise of a company's mission and personality of its CEO rather than its actual financial performance.

Here's why I bet against Tesla — an investment I sold (for a profit) after its quarterly losses were announced Wednesday, and before this article was published.

Tesla is investing in low-margin businesses.

Forget about pie-in-the-sky returns if you want to invest in Tesla or any automaker. Car companies typically make only about a 3% to 4% return when the economy is healthy. When the economy is in recession, they collectively lose billions due to fixed costs that are mostly unavoidable. Battery companies also operate in a low-margin business — making Tesla's huge investment in the Gigafactory seem even more risky.

Tesla has more than electric cars to compete against

One of the reasons why Tesla has done poorly in Europe and China is because both markets are loaded with millions of diesel vehicles that can provide outstanding performance and fuel economy without a stiff price premium. In China, the largest automotive market in the world, Tesla has stumbled with only 120 vehicles sold last month.

Tesla Gigafactory under construction.
Tesla Gigafactory under construction.

Tesla will likely have higher fixed costs 

Automakers don't have the luxury of "putting the chicken before the egg." Before they can sell cars, they must make cars, and this typically takes tremendous spending for assembly plants, equipment, suppliers and retail stores. In the case of Tesla, they have the added expense of finding demand for 500,000 battery packs from the Gigafactory by 2020. And where Tesla's strategy once saved costs, its battery pack choices may now be less cost effective than the competition.

Tesla's business model depends on subsidies

Tesla has received nearly $130 million in carbon-tax credits just from the state of California alone. The federal government has provided a $7,500 per vehicle subsidy for several years now, while 23 states provide additional subsidies between $1,000 to $5,000. The current level of subsidies for a Tesla equate to roughly 20% of the selling price of a Tesla Model S. Even with those subsidies, Tesla still lost over $100 million last quarter and delivered fewer than 10,000 vehicles.

Tesla's business model also depends on high gas prices

When gas becomes cheap, consumers traditionally take two steps to the left. Instead of buying a midsized car for example, they opt for crossovers. This is also true within market segments. People who shop for a Tesla also look at less expensive alternatives in the marketplace due to the fact that the cost benefits of owning an electric car go down dramatically when gas prices drop. As a result, a lot of affluent buyers have opted for the Nissan Leaf, which now can cost less than $20,000 in certain states thanks in large part to government subsidies.

State-by-state map of Tesla sales
State-by-state map of Tesla sales

Tesla's sales strategy hurts more than it helps

Tesla is currently banned from selling their vehicles in Texas, Michigan, New Jersey, Arizona and Maryland. Their sales are also severely limited in several other states thanks to the well-funded lobbying efforts of the National Auto Dealers Association and other dealer groups.

This has a devastating impact when it comes to selling cars, because franchise car dealerships collectively pay several billion dollars to display their inventory in areas that have the most drive-by traffic. Tens of millions of car buyers are exposed to these vehicles every day, and this exposure has a huge impact on the manufacturer's overall sales. Big-ticket items in the United States are almost always purchased in person, and Tesla's losses here have crimped its potential.

The Tesla Model S of 2015 can beat a supercar when properly equipped, but the company behind it is unable to make it a profitable one. Unlike last century's best-selling Ford Model T, a car that thrived on simplicity, the high costs and business challenges involved for Tesla's products are only the tip of a financial iceberg that requires billions in subsidies, and tens of billions of future investments, just to stay afloat. This for a company that currently sells fewer than 35,000 vehicles a year.

As much as I love the romance of what Tesla represents, the company's financial weaknesses and competitive threats have only grown stronger — and it will be an unglamorous slog to overcome them.